Thursday, 21 June 2018

Regular readers of Financial
Regulation Matters will know that, in 2015, Standard & Poor’s was fined
a record $1.375
billion for its role in the Financial Crisis, and in early 2017 Moody’s was
fined $864
million for the same offences. Although the two leading agencies of the
rating agency oligopoly were never in any great danger because of these
financial penalties, they did cause damage to their financial position.
Recently, however, a massive development has taken place which may see their
fortunes irrevocably increased. As part of China’s attempts to open up its
marketplace to the world, long-held restrictions on foreign businesses within
the Chinese jurisdiction have been relaxed so that now the agencies can set up
independent entities within the country, as opposed to the previous regime
whereby they could only hold minority
stakes in joint ventures with Chinese companies. This has a massive
potential for the agencies, who can now establish a massive foothold in such a
lucrative marketplace. The question is, what may be the effect of this
development, both for the agencies but also for China?

The rating agencies have been keen to add to the narrative
that new rules developed by the National Association of Financial Market
Institutional Investors (NAFMII) ‘will
facilitate bond market development’. One of the clearest reasons for the permitting
of foreign rating agencies on Chinese soil is that, as suggested in the
Financial Times, ‘ratings
from local agencies are widely viewed with suspicion’, which is an element
that would be completely removed from the equation with the establishing of a
foothold in the country by the leading rating agencies. It has been noted that
although China’s bond market is the third-largest
($9.7-11 trillion), foreign investment pales in comparison. This is a fantastic
development for the agencies, as the need to coax foreign investment into the
country fundamentally emboldens their position and importance to the Chinese. So
it is no surprise that the leading rating agencies have been drafted in to help
increase that foreign investment, but there are potential issues with this
arrangement.

The first issue is that China’s attempts to counter the
influence of foreign rating agencies, in establishing its own ‘credit
rating architecture’, have potentially been obliterated on account of the
greater need of foreign investment. It is likely that the ‘One
Belt One Road’ initiative is a key factor in taking this decision, but the
effect still stands that the dominant Chinese rating agencies, such as Dagong, will now be put in a precarious
position having to jostle with these oligopolistic leaders in their own
jurisdiction. The second issue is the danger in allowing the rating agencies,
who lest we forget have just received record fines for their performance and
organisational behaviour, into their oft-protected jurisdiction. China has,
primarily since the era of Deng Xiaoping, been open to the limited inclusion of foreign business, and different
administrations since have been keen to maintain that same stance. Now,
however, President Xi Jinping appears to be confident that he can loosen those
restrictions in order to provide the financial basis for his
generation-defining initiative – the question is whether this risk is worth it.
It is without doubt that Xi Jinping’s authority has been greatly strengthened
by the recent consolidation of his position, but there is perhaps a need to
suggest that Deng Xiaoping’s cautionary advancement into the globalised world
should not be abandoned just yet. Yes the One Belt One Road initiative is
important, but is the country ready to risk being overly exposed to the
iniquities of the Western financial realm? Perhaps there are many answers to
that question, but one thing is for sure: China has just increased its risk
profile considerably for the attainment of its cherished initiative.

Monday, 18 June 2018

In today’s post, the focus will be on an industry that has
been covered a lot here in Financial
Regulation Matters. Recently, two auditors, in particular, having been
making the headlines for all the wrong reasons, and as a result there have been
calls for the industry to be ‘broken up’. However, how realistic is that call?
There is a potential issue within society whereby calls are made that have no
substance nor any understanding of the dynamics at play, so in this post we
will look at the industry in closer detail to see just how realistic that
large-scale call actually is.

In the wake of the Enron Scandal and the collapse of Arthur
Andersen, in addition to a massive reputational breakdown of the wider audit
industry, the term ‘too
few to fail’ was put forward as a suggestion for why the industry could
simply carry on with their business once the news cycle has turned elsewhere. In
the last year, these suggestions have
been repeated, with there being an increased focus on the ever-reducing
level of competition within the audit industry. These claims have only
intensified on the back of recent public failures, with PwC recently being
fined a ‘record’
amount by the Financial Reporting Council (£6.5 million) for its role in the
collapse of BHS, and with KPMG being singled
out today in an FRC report. Though the FRC is clear that all of the ‘Big
Four’ audit companies ‘feasted’ on Carillion as it delved ever more into crisis,
the report singled out KPMG, noting that there had been an ‘unacceptable
deterioration’ in the quality of KPMG’s work in particular. This comes just a
week after KPMG was fined £3 million for its ‘misconduct’
when auditing the insurance software company Quindell. Predictably, this has
led to a number of calls to act against the auditors, with MPs calling for
PricewaterhouseCoopers to be investigated
further over its role in the auditing of Sir Philip Green’s business empire.
Some MPs have gone further, arguing that the ‘Big Four’ should be ‘broken
up’. The MPs report on the collapse of Carillion assessed the situation
with the ‘Big Four’ and found that, despite a number of initiatives to reduce
the competition-related issues, there has been little to no development in that
area. The report suggests that there some potential resolutions to this issue,
including breaking the industry up, regular rotation of auditors and contract
tendering, and also the division of audit and non-audit services. The report
ends with the statement that ‘it is time for a radically different approach’,
but what does that mean?

The first thing to note is that the audit industry is very
much similar to the credit rating industry, which is this author’s specialism
(as many regular readers will know). The reason that they are similar is not
because of the services they provide, but because they are oligopolies, and that must be
the starting point for any discussion. Unfortunately, the word ‘oligopoly’ was
only mentioned six times in this extensive report, with the very concept of an
oligopoly not being addressed. To understand this further, it is worth looking
at the calls of the report and assessing them against the study of oligopolies.

I would urge anyone interested in this topic to read Corporate
Power, Oligopolies, and the Crisis of the Stateby Professor Luis
Suarez-Villa; within the literature today, it is perhaps the closest account of
the realities of the oligopolistic structure in relation to finance and its
effect upon society (many others look at oligopolies, but from an economic
perspective). So, with regards to the calls of the MPs report, let us start
with the regular rotation of auditors and the tendering of contracts.

Rotation

The suggestion is that fee-paying companies – let us not
forget, companies pay for their audits, not the investors who need them –
should not be able to persist with any one auditor for a period of time, for
the purpose of reducing the bind that can be created by this which may lead to
inefficiencies and malpractice. However, in the UK in 2014, rules were
established so that FTSE 350 companies must put their contracts out to tender
(i.e. rotate auditors) at least every ten years. This sounds like a positive
endeavour. Yet, the report confirms that in 2016, the ‘Big Four’ ‘audited 99%
of the FTSE 100 and 97% of the FTSE 250’. So, the rules have enforced change,
but have in no way affected the oligopoly.

Breaking up the Oligopoly

The second suggestion of the report is to break up the ‘big
four’. This would be done by simply breaking the large audit firms up into more
audit firms, which would theoretically break the stranglehold of the oligopoly
and simultaneously promote competition. However, the question then who says
that is required or desired by the market participants? Here in Financial Regulation Matters it is often
stated that the public should be perhaps the dominant consideration in
financial matters, as they are the ones who pick up the pieces when things
inevitably explode, but in reality the public are not considered. The
consideration is for the companies who need to be audited to attract investment,
and for investors who must have their capital flows undisturbed as much as
possible. Even a cursory glance at the interests of these two parties confirms
that neither wants more auditors
(more on this shortly).

Division

Interestingly, this author’s new
book on the credit rating agencies makes exactly this same argument for the
CRAs, but there are a number of caveats. The suggestion is that because the ‘big
four’ have two particular streams to their business – audit and ‘non-audit’
services i.e. consultancy/advisory/ancillary – then it is the case that the
conflict of interests that arise from that dual offering should be removed.
This is not invalid, because as the report rightly states, in 2016 the ‘big
four’ recorded £2 billion in fees from audit services combined, but a
staggering £7.9 billion in non-audit fees combined. This has the effect of the
audit services, essentially, becoming ‘loss-leaders’ so that the firm has access
to a company in order to sell it the more lucrative non-audit services – this is
the very problem that engulfed Arthur Andersen and the Enron-era audit firms,
so much so that they were forced to divest these arms, albeit temporarily.
However, after researching this issue for a Doctoral Thesis and a Monograph,
this author found that there is little appetite for this approach from the
State, for a number of reasons.

The reason for all of these issues is the very concept of an
oligopoly. Also, in conjunction with
that concept, is the concept promoted by this author in the aforementioned
book, which is the divergence between the
actual and the desired. In the second chapter of that book, the focus is
solely on this concept, and for good reason. The concept is based upon the
notion that certain parties hold certain positions, with the noted parties
being companies (issuers), investors, and the state. All of these parties have
a stake in the process, and it is proposed that those stakes are intrinsically tied
to the economic cycles. For example, in a boom period, the state must be seen
to be encouraging business, which means encouraging investors to move their
capital and for issuing companies to grow and develop, for which they need to
borrow (predominantly). In this sphere, the issuing companies want to keep
their operating costs as low as possible, as do the investors, in order to
increase profits. Sounds simple, but if we look at the bust cycles, then there
is a different sentiment put forward. The focus is on both recovery and
attaining the heights of a boom period, so what is stated is often different to what is actually taking place. With
respect to the audit industry, this can be seen with the competitions authority
declaring that issuing companies must switch auditors at least every ten years –
in terms of optics, this is very much
a positive. But, if the aim were truly to protect the public and system moving
forward, then the state would take aim at the oligopoly, which by its very definition does not allow for
increased competition – the word itself is a derivative of a Greek word meaning
‘few sellers’. If the aim was long-term in its focus, the auditors would be
forced to irreversibly divest from their conflict-laden consultancy businesses,
which would serve to realign their focus on their audits and not treat them as
loss-leaders. We know, however, that this has not happened. We do know that the
illusionary approach of promoting competition was the approach taken, and in
that sense we can clearly see the aim of the state. This is because it is
imagined that the state acts for its citizens and their protections, so the
calls to dismantle the auditors are based upon the notion that the auditors are
causing harm, so the state must take significant action against them. However,
is that version of the state a reality?

Recently we looked at the work of Karl Marx, and it is
perhaps apparent that his work may be of relevance here. We saw in the wake of
the Financial Crisis, or at least those who care to look saw, that the state
does not prioritise the care of its citizens, but instead prioritises the care
of the system. Now, some will surely
respond to that by stating that to care for the system is to care for the citizen,
but this author disagrees. To care for the citizen and the system would have
resulted in quantitative easing, yes, but that would have been followed by extensive prison sentences to those who
offended. As we know, that did not happen. What did happen was a period, that
continues, of massive economic hardship for those at the bottom of society and political
unrest that serves to shape the future for generations to come. Yet, amongst
all of the sick
dying in hospital corridors because there are no hospital beds, a surge in
serious crimes like knife
crimes, state-based
attacks on the disabled, significant increases
in those using foodbanks and many more social ills that are intensifying
all the time, business is still prioritised, promoted, encouraged, and
supported even when there is clear evidence that the business elite are
plundering the marketplace – just think of RBS, Lloyds, Carillion, the ‘Big
Four’, and many others. Many may argue, and that is of course their right, but
the reality is that the state works for the system, not the public, and the
fallacy that if you embolden the system you embolden the citizen is exactly
that, a fallacy. So, in short, yes the audit industry is ‘too few to fail’, but
in reality the number of auditors is irrelevant – their place within the system means they are immune to failure,
and this is why the auditors behave in the manner that they do; they realise
their position. Furthermore, the leading members of these firms and others like
them are protected by their company-status, i.e. limited liability and
pro-business Directors Duties. The result is that they remain protected even
when proven to have transgressed, which is not a right afforded to any other
lowly citizen, and soon, when the news cycles turn and the economy picks up,
the focus will be on how to ensure that these very same firms grow – which, when you really take a
moment to stand still and consider that dynamic, is truly remarkable.

Friday, 15 June 2018

Karl Marx would have celebrated his 200th
birthday this year, and a recent article in the Financial Times has caused this author to muse ‘What would Marx
think of today’s society?’ In this very brief post, we look at this article and
discuss just what Marx may have thought of how society has developed, and
whether the common perceptions of Marx even do the great philosopher justice in
today’s consciousness.

This post is not meant to be a philosophical essay (far from
it), nor is it meant to be some political statement. It is a simply a brief
musing after reading a very interesting article here
in the Financial Times. It is
acknowledged that the FT is a subscription service, so whilst excerpts will not
be repeated here, the general essence of the article will provide us with
enough to look at the answer the
question posed above (one cannot answer it, of course). The article is
concerned with a project in Berlin set up to create a complete collection of Karl Marx and Friedrich Engels’ work, which
when complete will span over a staggering 110 volumes of work. Such a
staggering body of work will include letters and excerpts (which will be
published in a digital format only), and the project’s leaders predict that it
will be complete in 15 years’ time. The appropriately termed ‘Mega’ collection
has had, as the article explains, a remarkable history in that others who have
attempted such a feat have come in for political and, sometimes, actual
execution. Gerald Hubmann, who is leading the project, is keen to project the ‘real’
image of Marx and Engels, an image he suggests should be characterised as one
of academic and scientific debate rather than political discourse. Hubmann
argues that earlier attempts to document the scholars’ work have constructed an
image of the two as political animals attempting to meet political ends, but he
suggests it is more the case that ‘Marx saw himself as a researcher and a scientist’.
To supplement this point, Hubmann suggests that if Marx was a the political ideologue
he has been painted to have been, then he would have completed the famous Das Kapital – that he did not proves,
argues Hubmann, that he was an academic at heart and that he would have acknowledged
that he did not finish this incredible work because, simply put, he could not…
the research was not completed enough to allow him to do so. There is sense in
this argument because, as Hubmann argues, if he was an ideologue, he would have
completed the work and disseminated it to meet a certain goal.

It is likely the case that Das Kapital is one of Marx’s most famous works, perhaps behind the The Communist Manifesto, but that he did
not conclude the work and others have done in his name is problematic. Hubmann
discusses how this important element to Marx’s career and life, which as a
scenario is replicated in another famous work – The German Ideology – has caused great consternation amongst
followers of the Marxist ideal, with Hubmann noting how the Chinese Communist
Party were displeased with the release of a new version of The German Ideology that proclaimed that ‘social existence
determines consciousness’. The Chinese Communist Party apparently were unhappy
as this notion affects one of the ‘pillars’ of Marxism.

Yet, the collected works bring forward new discussions
regarding the work of these two scholars. Interestingly, Hubmann notes how even
the remarkable level of output from the two is something of interest, mostly
because they used to write side-by-side on occasion, page-by-page, so it is
difficult to determine what ‘order’ the scholars wanted their narrative to be
interpreted by the reader (as endeavours such as Hubmann’s piece them together
after the event). However, it is noted at the end of the article that such
endeavours are in-keeping with the times, as since the Financial Crisis there
has been a marked increase on the work of the scholars from around the world.
What then would they make of today’s world, particularly in this post-Crisis
era?

It is, of course, an academic endeavour to ask such a
question. The obvious response would be that Marx may feel vindicated in his approach
because capitalism continues to lurch from crisis to crisis, enveloping all in
its path just as he predicted in The
Communist Manifesto (in fact, one need only read a few pages from the
beginning to find such prophetic proclamations). However, rather than ask if he
would feel vindicated, there may be other questions that would be better to
ask. One of those may be to ask his thoughts on the scale of capitalism, as the capitalism he experienced has since
morphed into something completely different. Now capitalism reaches into life
(particularly first-world life) in such an intrusive manner – via the
incorporation of modern technology in modern life – one wonders whether he could
even comprehend that such an expansion was possible of such a system. He was,
of course, effusive in his argument that capitalism is an organism that ‘spreads’,
but its spread is so remarkable one wonders if he would even recognise this
system as capitalism, or perhaps something else? There are of course a number
of aspects of current life that he would realise, with aspects such as
wealth-extraction, severe divisions within society (on many aspects, not just financial),
and the presence of substantial globalisation (despite the best efforts of a
certain political leaders) being clear examples of what he warned against. Yet,
on that basis, one wonders whether he would change his views in light of what
he would see today. This author studied Marxism during his first degree, and it
was always apparent that certain elements of nature were, for want of a better
term, overlooked. Perhaps ‘overlooked’ is too strong a term because Marx did
acknowledge such elements a number of occasions, but his suggestion that the
world would/should go back to a developed form of ‘early communism’ would be
something to debate with him today. For example, what would his thoughts be on
an argument that suggests with the ever-increasing human population, the
inherent iniquities of human beings would be a natural prevention to the
realisation of his idea? That is a common question that is asked of Marxism –
how does this model actually apply to
human beings – but the added element of an increased population may add a
different dimension to this imagined conversation with the great philosopher. Perhaps
the model only works when populations are at a certain size like that
experienced by early humans? Perhaps that is not true, and that it is the
presence of the ideal of capitalism as a counter-measure which is the
foundation of any prevention. This author suggests that Marx would be
tremendously staggered by what he would see today, but similarly not in the
least surprised.

Marx has a permanent place in human history for his work,
and rightly so. It is right that he has this place not because of one’s views,
but because of the philosophical endeavour
of the man and his work. But, one element stands out above all others when we
consider his works on capitalism, and that is the concept of its ‘spreading’,
or better still ‘contagion’. Despite what we may see on the news channels and
on our phones whilst browsing Twitter feeds that suggest to us that globalisation
is in recession, and that nationalism and individualism are marking
irreversible marches to domination, it is not true. A system as complex and
strong as capitalism does not simply die away as many have suggested in the
past and continue to do so. It is, by its very nature, parasitic in composition
– as the world grows, so does it. That last comment was not a comment on the
worth of capitalism, but only on its composition, and in this imagined conversation
with Marx one feels that it would be this element that would be most intriguing
to him. On the 5th of May he would have celebrated his 200th
Birthday, and now 135 years since his passing the composition of the system of
capitalism has morphed into something much greater, something much more
advanced – perhaps he would not even recognise it? If that was the case, one
wonders what the philosophical implications of that are for us who inhabit the
current system.

In the first of a few brief posts today, we shall be looking
at a forthcoming article by this author on the credit rating agencies and their
potential involvement with a push to increase corporate governance disclosure
rates in the EU. The article was invited as part of a special edition for the Corporate Governance: The
International Journal of Business in Society Journal, and will be
published very shortly.

The article is concerned with the European Commission’s (EC)
efforts to increase the effectiveness of corporate governance disclosures,
which is a system they have established which aims to construct a ‘comply or
explain’ system of corporate governance reporting. The system was set up by the
EC in 2014, and would take the form of what are called ‘corporate
governance statements’. Since this system has been established, it has only
witnessed limited success because, as was mentioned in a commissioned report
for the EC, there has been a lack of ‘informative
disclosure’ from companies caught by the regulatory endeavour. The EC acknowledged
this in 2011 and since then have been formulating measures to help alleviate
the problem, but there are a number of issues at play. The commissioned report
noted that, as far as investors were concerned, only a quarter of reporting
companies were producing information regarding their compliance with stated
corporate governance regulations as ‘sufficiently good’.

Essentially, the program dictates that companies who are
caught by the regulation (it differs by size and status i.e. public companies)
must declare in a separate statement alongside their annual reports which
national corporate governance regime they are following, and how they are
complying with that stated regime. Taking influence from other jurisdictions
that have applied a similar philosophy previously (like the UK), the EC wanted
to allow for flexibility so companies are allowed to miss their obligations (if
it is reasonable for them do so, on account of aspects such as applicability
related to size or industry etc.) but they must subsequently explain why then
have chosen not to comply. In attempting to increase the effectiveness of the
regime, the EC has decided that a regulatory amendment is in order, and not a
private one. That regulatory amendment takes the form of the national
regulators (the ‘competent authorities’) taking a more active role in the
monitoring of responses and the enforcement of the regime. The article
discusses how that, according to some in the literature, ‘the market is not
particularly concerned about non-compliance’, which adds to a viewpoint that
there are very few deterrents within the current regulatory regime. This
argument is based on the concept that, for investors, it is likely a ‘comply or
perform’ dynamic, rather than a ‘comply or explain’ dynamic on account of
investors tending to focus on the financial
performance of a given company in respect of its organisational behaviour.
For example, the suggestion is that if a firm is performing well, then it must
be being governed well. We know that this is not the case, because a company
may be performing well for many reasons other than good governance, and indeed
it may be the case that the company is performing well because it is not being governed well. We know this dynamic to be short-termism, which is something the EC
is trying to reduce on a systemic scale. However, the question for the article
is whether the approach is increasing the regulatory framework is optimal or
not.

There are issues with the call to increase the regulatory
framework. Though it is often the case here in financial Regulation Matters that giving more power to the market
is rarely called for, on this occasion the increase in regulation is littered
with potential inefficiencies. One inefficiency that the literature has found
is that the cost to the national regulators will increase, whilst the perception or the care from investors
will not. If that dynamic comes to bear, then it is unlikely that companies
will respond by increasing their disclosure rates. It is probably more likely
that a ‘box-ticking’ exercise will ensue that will cost regulators but not
benefit the marketplace. It is for this reason that the article suggests, but
only suggests, that a different approach may be required.

That approach is to work with the credit rating agencies
more and push for a slight alteration in their methodologies. Any regular
reader of Financial Regulation Matters
will know that this author is particularly critical of the credit rating
agencies, and this article does not suggest that the rating agencies are the
most optimal option as they stand.
However, theoretically, they do have a potential role to play. For the
agencies, methodologically speaking, ‘governance’ is one of the key factors in
developing a credit rating. If a CRA is concerned with whether a borrower can
repay a loan on time and in full, then how that borrower is governed will
naturally be of importance to the designation of that particular rating. To
digress, in a forthcoming book by this author entitled The Role of Credit Rating Agencies in Responsible Finance, the
focus will be on examining the incorporation of ‘ESG’ principles into credit
ratings – Environmental, Social, and Governance – although, for the rating
agencies, they are incredibly clear that, for
them (and for investors too), ‘Governance’ is the primary factor. So, if
governance is a key factor for the agencies, what does that mean for the EC’s
push for an increase in governance disclosure rates?

The article suggests that if the CRAs were to adapt their
methodologies slightly so that, now, a credit rating included the quality of a
company’s CG Statement disclosure, then there would be a market-based
deterrent. Furthermore, this deterrent would be much more powerful than
anything the state could provide, mostly because of how it would be received.
Leaving aside whether it is positive or not for one moment, the marketplace is intrinsically
linked to the CRAs and their ratings, and as such a negative rating carries
serious weight for companies. You can often see press releases from companies
(and states) and annual reports mentioning the need to improve a credit rating
or protect a credit rating, and that is because investors use credit ratings.
The reason why they use these ratings is another matter and has been discussed here
in the blog, but the fact that they do means that companies would be incredibly
attuned to the rating process. If the CRAs were to include the quality of
governance disclosure within their rating, and also make that incorporation
transparent for investors, there exists a real opportunity to develop a
meaningful deterrent. The result would be a system whereby not only would poor
disclosure be punished, but good rates of quality CG disclosure would be
rewarded, which is a situation the EC covet. However, there are potential
issues because of how the CRA industry is set up, and the ‘issuer-pays’
remuneration system is the largest issue of them all. If this system was put in
place, then there is a potential that the issuer-pays dynamic would be
leveraged so that the CRAs favoured the issuer when deciding the quality of the
CG statements. For those who may read this and suggest there are safeguards in
place to prevent that, this author would suggest that those safeguards –
reputational pressure, competition, transparency – have always been in place
and have been proven to have failed on a number of occasions in the past. But,
there is a potential if the EC and the CRAs were to consider it.

Ultimately, however, the article suggests a regime that may work, but whether that gets adopted
or not is another question entirely. Why would the CRAs increase their workload
when they are recording massive revenues anyway? Is there an appetite from the
EC to incorporate financial third-parties? To answer the first question, the
CRAs may adopt this program as it would increase their shattered reputation in
the eyes of investors and the financial arena, but we know here in the blog
that they are not subject to reputational pressures. To answer the second
question, the EC has shown that they favour the regulatory approach rather than
a private approach, and that may be because of the damage the rating agencies
caused in the Eurozone Crisis after the Financial Crisis – perhaps those wounds
are (understandably) not healed yet. Nevertheless, there are options available
to the EC and the marketplace to add a level of effectiveness to the CG
Statement regime that is currently missing.

Monday, 4 June 2018

To say that the post-Crisis era has been challenging for
Deutsche Bank would be a massive understatement, and recently their woes have
worsened considerably. In today’s post we will focus on the Bank and its
troubles and look at its chances of surviving such a turbulent time in its
history. Ranging from massive fines to shareholder revolts, the Bank is
lurching from one crisis to the next, and over the weekend S&P slashed its
rating on fears that the bank will be unable to recover from this era of
crisis. Therefore, a question that may need to be posed is whether the bank is
approaching the end of its crisis, or whether these continuous troubles are
merely the red-flags in the demise of this massive bank that had grand
ambitions.

Developed in 1870 by the bank’s “true founder” Adelbert
Delbrück, the bank’s
original ‘statute’ ‘laid
great stress on foreign business’. Very quickly the bank opened branches in
Japan, China, the UK, and of course throughout Germany, although the bank’s own
account of history notes that raising foreign capital with a name like Deutsche
Bank proved difficult. To counter that problem, the bank would develop
innovative models and products to help its expansion plans come to fruition.
This snapshot of their origins has been included here because, if we look at
the current problems being faced by the bank, it is this expansionary vision
that is proving to be their greatest liability, and no longer their greatest
asset. This is perhaps proven in retreat, and earlier this year the new CEO of
the bank – Christian Sewing – was abundantly clear that long-held plans to
challenge the giants of the global investment banking scene, like Goldman Sachs
for example, had proven particularly costly and would not be
part of the bank’s plans for the future. Again, to say that those plans had
proven costly is an understatement, with their $7.2
billion fine for misleading investors in the US proving to be a critical
juncture in this story of crisis at the bank.

Ultimately, it is difficult to say that Deutsche Bank will
fall. It is difficult to say this not because of Sewing’s declaration of
financial strength – this is not to doubt his integrity, but saying anything
other than this would be suicide for the bank – but quite simply because the
widely-held (and probably amnesic) view that banks have had their ‘too-big-to-fail’
status reduced since the crisis is simply not true. Think of it this way, if
the Bank was to show signs of imminent failure tomorrow, would the EU and
Germany stand by and let it fall? The bank is far too entrenched for that to
happen, but the reality is that this theory may soon be tested, because the
sheer ferocity of these crises is perhaps indicative of the inevitable – not many
companies faces crises of this magnitude, and this frequency, and live to tell
the tale. Fines, job-cuts, criminal investigations, rating downgrades, a
failing surrounding marketplace, and regulatory warnings are always negative occurrences,
but to experience them all, within the space of a couple of years, has the
potential to be terminal. The bank’s strength, and the political institution’s
belief in not meddling in private institutions’’ affairs, will no doubt be
tested in the near future if current trends continue.

Contributions are welcome to this blog. If you would like to contribute regarding any area of financial regulation, then please feel free to email me and submit your blog entry. The content should be concerned with financial regulation, and why it matters, but this is broadly defined. The blog is open to all who are professionally concerned with financial regulation, which may range from an Undergraduate Student interested in writing on the subject, to Professors and industry participants.